Letters of Intent for Urgent Care Transactions
When getting ready to sell your urgent care center, letters of intent (LOIs) are important documents that should be examined carefully. LOIs can be binding or non-binding, depending upon the transaction and the parties involved. While there are some key factors that sellers should be aware of in an LOI, the most important one is balance.
“If one side wants deal protection, the other side needs deal protection,” Blayne Rush, M&A Broker and publisher of The Ambulatory M&A Advisor, says. “If one side wants to lock you up, you need to be able to lock them up.”
Buyers can try to lock sellers in by placing no-shop clauses and price adjustments in an LOI. The challenge with that is that it’s typically one-sided.
“The buyer has all of the leverage at that point; you give up any leverage on price and the chance to negotiate with other players,” Rush says. “If they want a no-shop clause to lock you up, you need to go deep and wide with the terms of the LOI. The more commitments that a buyer wants from you, the more commitments you have to get from them, or you’ll find yourself negotiating against yourself.”
In order to counter a no-shop clause, Rush recommends suggesting a breakup fee, or reverse breakup fee. John Murdoch, healthcare attorney at Wilentz, Goldman & Spitzer P.A., says that sellers should shorten the period of time allotted between signing an LOI and when a definitive purchase agreement must be executed, or either of the parties may terminate the LOI.
“It’s kind of like a deadline to get to the definitive purchase agreement,” Murdoch says. “If you have a single location, you might allow 15-21 days for parties to move towards an agreement, and if that’s not executed, either party can terminate. If you’re working on the deal and hit that deadline, then you may decide to just keep working on it anyways.”
Matt Fisher, Co-Chair of the Health Law Group at Mirick, O’Connell, DeMallie & Lougee, LLP, says that sellers should also be aware of any confidentiality and exclusivity provisions in a letter of intent.
“Confidentiality provisions will protect your business and any information shared in the discussion,” Fisher says. “Make sure that the provision survives the expiration or termination of the letter of intent in case a buyer decides not to proceed with the transaction.”
“You also want to keep things confidential and be aware of public announcements,” Murdoch says. “You want everything to be kept very quiet until the transaction actually happens.”
Rush says that collusion is another problem that could arise for sellers.
“Buyers could collude together and say they’re going to go in together to buy your business, and that will take away some of your leverage and competition,” Rush says. “If they start working together, they’re lowering the number of competitors for your business, and it’s very possible that you’re going to lower the price.”
On the other hand, Rush says that might be the best way to go, but that you need to be in control of that.
Both Fisher and Murdoch recommend addressing letters of intent early on in the transaction process.
“It helps to guide the rest of the negotiations,” Fisher says. “If it’s done early on, you have the basic terms in place and then you can flush those out as it goes on.”
“If an LOI happens earlier on, it can really commit the parties to go forward and negotiate the agreement,” Murdoch says.
However, Rush recommends signing an LOI later on in the transaction.
“I would not accept an LOI or agree to an LOI early in the process,” Rush says. “So many things can happen later on; if it does not work out and you have to go back to the market, then you’ve dirtied the market.”
Rush says that dirtying the market happens when a seller announces they’re off the market before the buyer has done a deep dive on their business and it falls through.
“The buyers aren’t sure if they’re even buying your business yet, and you’re telling people you’re not for sale anymore,” Rush says. “You don’t want to be in that position.”
Rush says to look at the transaction as a relationship.
“You want to be able to date until you’re ready to get married,” Rush says. “Before entering a letter of intent, the buyer and seller needs to know how and when the deal is going to get done, and make sure that both parties are fully informed.”
In addition to no-shop clauses, confidentiality provisions and timing of the LOI, sellers should also be aware of other key business points.
“Identify all parties, assets, ownership of the entity, restrictive covenants and any contingencies,” Murdoch says. “Talk about what each of the parties need to have happen before they can go forward.”
“I would want all of the big rocks that could be deal-killers later on included in an LOI,” Rush says. “How is the deal structure going to happen, what will the compensation and requirements of the physicians be and what are the non-competes going to be?”
Fisher recommends using a healthcare transaction lawyer to draft any LOIs, in order to maintain fairness for both parties.
“Trying to go for fairness is generally the better way to go,” Fisher says. “Certain terms might be better for one party than another, and that is certainly acceptable, but I don’t like to draft documents that have terms that go too far in favor of one party.”
If a buyer or seller chooses to draft the document themselves, Fisher recommends having a healthcare attorney review it.
“You want to make sure that you aren’t committing to things unintentionally, or leaving certain terms out,” Fisher warns. “Anytime you’re dealing with anything that’s an agreement, contract or has any type of legal implications, it’s always advisable to seek advice and make sure you understand everything that’s going on.”
Working with an investment banker or broker is also recommended.
“With LOIs, you’re always thinking about two things: you hope everything works out great and you move into a definitive agreement and a closing, but at the same time, you’re also thinking about what happens if everything falls apart,” Murdoch says.
An investment banker/broker can help sellers successfully negotiate letters of intent for urgent care transactions.
“They’re going to hold your hand through this entire process,” Rush says. “They’re going to know what the typical terms are, what should be in an LOI and what shouldn’t be.”
Murdoch says it’s best for sellers to get their team of consultants lined up early on.
“The key thing with any healthcare transaction is to get your team lined up before you get too far into this,” Murdoch says. “Before you do anything substantial, have your healthcare attorney, healthcare accountant, investment banker and insurance advisor on board. Having everyone ready to go is helpful.”
“If a seller isn’t represented well, and doesn’t have the right consultants around them, there’s a lot of things they’re going to leave out of an LOI,” Rush says. “They will end up with an LOI that is heavily driven by what the buyer wants.”
Unless a seller has significant experience, Rush suggests not to go it alone.
“It’s the largest financial transaction that a physician seller is going to undertake in their life,” Rush says. “Having to spend a little bit of money upfront is worth it because sellers are going to get better terms and a better price.”
Ultimately, sellers should be aware if an LOI is binding or non-binding, and if it is well balanced for both parties.
“Buyers and sellers are both going to be looking out for their best interest, but most people are honest people,” Rush says. “Buyers aren’t going to try to sneak one over on you, and as long as it’s a non-binding LOI, you don’t have a lot to be worried about. In addition, you don’t want to go into it with that attitude, because that will cause the other side to question your integrity, your commitment and your ethics.”
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